Broadband

FCC broadband analysis uncovers seven critical gaps

The FCC has jumped decisively into the broadband deployment issue with a number of new initiatives. In the “concrete” area, it issued a declaratory ruling to expedite the decisions on cell tower installation, removing what some operators characterized as selected local logjams.

Perhaps the most far-reaching thing in the laundry list of broadband commentary yesterday was a task force report from the national broadband plan activity that listed no fewer than seven critical gaps that impact broadband availability. In summary, they were USF limitations, demographic inequality, consumer education problems, spectrum limitations, infrastructure cost barriers, STB innovation stagnation and privacy issues. While there has been publicity to suggest that open access is now a strong contender, those views are linked only to past studies and not to any current comment by the FCC. We indicated our view on the Berkman study in a past blog; we disagree almost totally with its findings.

Telstra’s separate susidiary buzz: Government plan could zap ROI

Telstra, Australia’s national carrier, remains locked in a dispute between its shareholders and the Australian government, which proposes to break Telstra up to support its broadband network initiative. Telstra believes it can play a role in NBN, as the network is called, without structural separation. Discussions on how that would be accomplished were proceeding nicely, according to Telstra, until the legislation for separation was introduced.

We are of the view that separation like this is not likely to succeed at its objectives and in fact is more likely to compromise them. In addition, it would clearly undermine the value of Telstra’s shares, which have been sold off to the public for some time through yet another government program. To take steps to devalue them now is not likely to create confidence in any new government process, including NBN.

Then there’s a very important truth, which is that competition always lowers price and always creates overbuild and thus always lowers net industry ROI. There are situations where that is reasonable; some geographies have ample demand density. Australia doesn’t appear to be one of them, according to our model.

If the government’s goal is to create competition in the interior or service portion of the network by making the access network into a shared utility, it should have clear indicators that the ROI in that service portion is sufficient to create real opportunity. Without that, there could be a lot of future failures in the center, which would undermine the profitability and sustainability of the new edge—whatever it turns out to be.

Internet’s classic model no longer the reality

An interesting piece on the evolution of the Internet shows pretty convincingly that the classic model is being replaced by a new one where content portals and content delivery networks (CDNs) peer with access ISPs, eliminating more and more of the classical notion of an Internet backbone.

We’ve talked about this trend often. Experiences are a resource-to-user connection and not a user-user connection and thus don’t demand universal peer connectivity. While in theory, there are many resources available on the Internet, the practical reality is that most of them are found at statistically insignificant rates and contribute nothing to value and traffic—today.

The challenge we now face is whether the profit-driven evolution toward content concentration and experience networking is going to change the nature of the Internet. Is it becoming a big TV network, in effect? How much of what broadband policy is trying to preserve in the way of innovation and flexibility is already being lost to a quiet restructuring? We aren’t railing against the changes, only against the fact that we’re not facing them squarely and talking about the consequences.

Google, for example, is building the most connective resource center on the planet, and with that, it has a jump on any new application, not to mention the older ones. All of the talk about how Internet traffic is growing (Cisco) or how operators’ backbones are expanding (AT&T, Verizon) treats the Internet as homogeneous. It’s not, and how its structure is changing is critical to everyone.

Mobile web has “senior” appeal

Mobile web use is actually growing fastest among seniors, according to a recent report. While much of this is due to the very low adoption rate there (3% of mobile web users are over 65), part is also likely due to the fact that applet-based or widget-based web tools are easier for seniors to navigate and more directly linked to their needs.

Research has tended to show that older users use the Internet more narrowly, “by rote,” and thus may be less interested in the range of things that you can do on broadband than with the specific need to find a restaurant or store, for example. This means that a wireline broadband appliance tuned to provide at-home information like TV schedules, health information, etc. might induce more seniors to adopt broadband at home.

FCC universal broadband cost estimate doesn’t factor in performance

The FCC said that giving 100 Mbps broadband to every home would cost $350 billion, which is about half what we think it would cost to give every household FTTH and therefore pretty consistent with our own models. The FCC also said you could provide 50 Mbps for $50 billion, and our model says that’s a third of the actual number.

The relationship between broadband cost and service performance is complex, and we suspect that most planners simply haven’t delved into the details at this point. The issue here is that public policy goals in broadband might be aggressive because of intense industry lobbying, but that real progress is unlikely to be made toward universal service unless there are major compromises in performance.

We are covering this issue in depth in October’s issue of our newsletter/journal Netwatcher.

FCC net neutrality proposal confuses the issue

Reviewing FCC Chairman Genachowski’s comments on the net neutrality process, we find that there are a number of interesting points.

• First, the FCC is indeed proposing to apply net neutrality to wireless, which is something that’s already caused concerns among wireless providers. Wireless is the last bastion of profitability for the operators, after all.
• Second, the FCC is making it very clear that net neutrality rights will apply only to lawful content, and in fact Genachowski specifically said it would not apply to P2P that infringes on copyright. That means that the ISPs would be free to interfere with “non-lawful” traffic.
• Third, and perhaps most significantly, the FCC is saying that while it is important to offer managed services, which we assume means services with managed QoS, in parallel with the Internet, these can’t be allowed to compromise Internet service capacity and quality growth. This could pose the risk that the FCC might reverse its long-standing position on IPTV.

We don’t know exactly what the FCC has in mind (nor does anyone else (which likely includes the FCC!), but this announcement could create more uncertainty than clarity, which could influence U.S. providers’ investment in broadband. A Senate bill to block the order has been introduced, but it has no chance of passing. The House net neutrality bill will, according to sponsors, move forward.

Regulation in Australia — bellweather for subsidized services

Australia is giving Telstra, its national carrier, an unusual ultimatum: Create a separate subsidiary structure or be barred from further access to spectrum. Needless to say, the move has raised howls of protest from many quarters, and it poses one of the most critical questions in all of telecom today.

One problem with a break-ups like this is the loss of shareholder value, and there has been no satisfactory answer to that problem in the Telstra case. Another more potentially significant problem is the loss of investment incentive in a market where everyone wholesales from a single player. That killed broadband growth in the U.S. for almost a decade after the Telecom Act was passed.

In Australia, a government-subsidized broadband build-out is the proposed solution, but nobody really knows if that will work. The government is presuming that investment can be guaranteed by taxpayer subsidy and that competition will force service prices down. The problem is that competition will then demand perpetual subsidies, since return on investment for service competitors is likely to be minimal, and they won’t contribute to building out a shared infrastructure.

Australia has always had the most pro-competition regulatory bias of all industrial nations, and how they cope with these issues will be the conclusive indictor of whether even subsidization can sustain such a regulatory model. We don’t think it can.

FCC wireless market inquiries overdue, could affect spending

The FCC’s agenda for its August 27 meeting shows a commitment to a broad review of the wireless market, from its role in the national broadband policy to the state of competition and some wireless practices.

Both these activities are being considered for a Notice of Inquiry, which would launch a formal FCC process here. The interest in wireless is overdue. The FCC has far better data on and oversight of the wireline communications services, and yet wireless is becoming the prime mechanism for communications for a large segment of the population.

Operators hate this sort of thing; it raises the risk that the wireless cash cow will be shut off by the FCC in the form of new rules. The problem is that most U.S. operators are profitable because of wireless, and it’s not clear what would happen if the FCC were to curtail revenue/profit growth there through new regulation. The process will take time, and it’s not likely to impact 2010 budget planning, but it may keep wireless infrastructure spending plans tilted to the conservative side.

Internet regulatory policy and the “middle mile”

The notion of a government-subsidized Internet is enormously appealing to many, and nearly everyone in the media, so it always gets a lot of hype. There are, in fact, some programs to provide broadband subsidies, ranging from the limited U.S. rural subsidy program to the incredibly ambitious Australian new broadband network initiative.

We see few signs of any real trend toward general subsidization, however. Both the U.S and Australian programs are aimed primarily at dealing with the challenging economics of broadband where economic density is low. In the U.S., the FCC’s just-issued Notice of Inquiry (NOI) on the annual broadband report to Congress suggests that while the Commission is looking deeper into what broadband is and who has it, the changes are tiny steps not likely to generate revolutionary results any time soon.

We believe that in any event, the complexity of defining the real performance of broadband Internet services (which depend on access speed, oversubscription in the metro network and Internet peering performance, among many variables) will make it difficult to provide any meaningful subsidies. We wonder if either the U.S. or Australia has considered this “middle-mile” question adequately.

DOCSIS 3.0 spurs cable/telecom broadband “speed wars”

There are some signs that the DOCSIS 3.0 broadband speed wars are already having an impact on the market. Both Verizon and AT&T have been boosting their broadband speed tiers in preparation for the expected pressure on speed generated by cable companies. But there’s also a general industry push to sign new customers through incentives like the FiOS free-netbook deal.

Industry data shows that almost three of every four TV viewers will stay with their incumbent operator unless there’s some exciting incentive to switch. The summer is also a good time for promoting a change; with kids out of school and the main channels in reruns, there’s more interest in premium channels and in the use of the Internet for entertainment.

A more significant marketing initiative by Verizon is an increase in the uplink bandwidth to accentuate an area where cable lags even with DOCSIS 3.0. FiOS uplink speed has doubled or more in the lower tiers of the offerings, but pushing how fast uploading content could be risks encouraging P2P, which is the form of consumer uploading most commonly used.